Euro Under Pressure as German CPI Unexpectedly Hits 2% Target

The Euro is facing renewed selling pressure after key inflation data from the Eurozone's largest economy surprised to the downside, fueling speculation that the European Central Bank (ECB) may need to accelerate its rate-cutting cycle.

German Disinflation Accelerates

According to preliminary data, the German Consumer Price Index (CPI) rose by 2.0% year-on-year in December 2025, a significant drop from the previous reading of 2.6% and well below the market consensus of 2.2%. This marks the first time since mid-2025 that German inflation has perfectly aligned with the ECB's explicit target.

The data follows similar cooling trends in France and Spain, painting a picture of broad-based disinflation across the bloc. Consequently, EUR/USD has declined, hovering around 1.1710 and erasing earlier gains as growth concerns resurface.

The Service Inflation 'Sticky Point'

Despite the headline success, ECB policymakers remain cautious. Analysts point out that while energy and goods prices have fallen, core service inflation remains sticky due to persistent wage pressures.

“We are seeing the headline numbers align, but the underlying mechanics of service inflation suggest the battle isn't entirely won,” noted analysts reacting to the print. ECB Executive Board member Isabel Schnabel reinforced this caution, stating that borrowing costs could remain stable “for a long time” absent major external shocks.

However, the market is beginning to challenge this “wait-and-see” rhetoric. With growth indicators appearing fragile, the swift return to 2% inflation in Germany significantly lowers the hurdle for the ECB to cut rates earlier in 2026 than the currently projected mid-year timeline.